It’s paved with good intentions, of course, and one would hope that good intentions with pure motivation are behind the massive bailout passed last Friday. Good intentions or not, the whole exercise is completely misguided, but this bill, or something akin to it might just be a political necessity in these days of the welfare state.
While the public was overwhelmingly against the bailout, stories—many of which were obviously false—started making the rounds, speaking of credit suddenly tightening up, and the entire economy being on the verge of implosion. Yet, when examples were shown in the media, they invariably were of dicey enterprises, such as popcorn boutiques, which were questionable business models even in the best of times.
Is it more difficult to get a mortgage loan than it was a few weeks ago? Definitely, but if you have good credit and the appropriate down payment, there is little problem obtaining financing. After all, banks are still in the business of making loans, only these days they actually have to be good loans.
As has been noted elsewhere, the original bail out bill took up all of three pages, and was defeated. The successful bill grew to an amazing 442 pages, including a host of unrelated measures, such as:
- Dozens of assorted tax breaks for favored industries
- Various eco-friendly provisions
- Increased powers for the IRS
- Certain provisions against excessive compensation for failed financial industry execs
- A boost in FDIC coverage
Notably, both presidential candidates came out in favor of the bailout. One can’t help but speculate as to what the reaction would have been if “Maverick” John McCain had come out against it—even knowing that it still would pass.
For what it’s worth, my proposal would have cost almost nothing, and could have solved the crisis in confidence almost instantly:
1. Get rid of the absurd mark-to-market accounting rule, that deflated banks’ assets for no good reason. No doubt, many of the homes being financed had decreased in value, but so what? The majority of the owners were making the payments. Thus, the banks had performing loans, and cash flow was fine. This would be the equivalent of lowering an employee’s salary if he happens to be sick for a few days, since at that exact moment, his value to the employer is diminished. What nonsense!
2. Instead of giving Henry Paulson $700 billion, create a mortgage repair agency, whose sole function is to meet with homeowners who are having trouble making the payments, and try to work out deals with them, either in terms of lowering interest rates or extending terms. For those who simply want out, regardless of any deal, engage local real estate agents to sell these properties on the normal market.
3. Let banks either fail, or get gobbled up by their stronger brethren. This sort of thing happens in other industries all the time. What’s so special about banks? Indeed, the only special thing about banks is that they DON’T create wealth, but simply move it around a bit. At best, they provide money for growth, but why should their investments—uniquely—be protected?
The only problem with this proposal is that it flies in the face of the expectation that dates back to even before FDR that the government will intercede and help the people in any crisis—real, imagined, or caused by the government itself.
Ironically, the oft-quoted and mocked line “I’m from the government, and I’m here to help,” reflects the public’s ambivalence with government solutions to problems. Yet, the cavalcade of expensive budget-busting socialistic programs continues.
It promises to get a whole lot worse before it gets better.